Tuesday December 30, 2014, 3:40pm PST
By Teresa Matich+ - Exclusive to Copper Investing News
2014 was certainly not a breakout year for copper. For 2015, Stefan Ioannou of Haywood Securities expects more of the same, and predicts that a turnaround is still a few years down the road.
Despite a lot of excitement surrounding shadow banking in China, Indonesia's mineral export ban and a flurry of M&A activity, copper prices dipped lower in the second half of 2014, and sat below $3 per pound for most of December. On Monday, prices fell to their lowest level in over four years, and are now at around $2.85 per pound.
Ioannou to some extent made that call back in November. While he predicted that prices would moderate between $3 and $3.25 per pound for 2015, he also stated that the metal could very easily dip below $3 for "some period of time" next year.
"With the copper price, just given where inventories are at and the current supply stream that we have from existing mines, we don't see any sort of breakout year … for copper," Ioannou said.
However, that might not necessarily be a bad thing. Though low copper prices might make investors anxious, they don't necessarily mean a nail in the coffin for copper producers.
"Even at $3 per pound copper, basically everyone in production is making money. Even the highest-cost copper producers are producing copper at $2.50, $2.60 per pound," said Ioannou. "The copper price could arguably dip below $2.75 per pound, and you wouldn't see a major impact on current demand fundamentals."
On the other hand, he pointed out that if copper gets to $2.75 per pound, it will be difficult for producers to justify new development, which could lead to a supply crunch down the road. "Development that should be taking place today in anticipation of the need for new copper isn't happening," he said, noting that many producers have started to focus on cutting costs at existing mines rather than developing new projects in light of lower prices.
While the analyst stated that there are some very large projects on the drawing board, those larger-scale mines are also intrinsically low grade, meaning they need copper prices at $3.50 per pound or higher in order to be built.
"We need a lot of new, big mines to come on to meet eventual demand. There's no doubt," Ioannou said, suggesting that a strain on supply could come around 2017 or 2018.
Meanwhile, companies are still hesitant to be optimistic about the overall market going into 2015. Responding to a survey on the market this year, Steven Dischler, CEO of Quaterra Resources (TSXV:QTA,OTCMKTS:QTRRF), predicted "more of the same with no major change in the market for 2015," while Fiona Childe, vice president of corporate development at Foran Mining (TSXV:FOM), sees a "mild recovery" as the best-case scenario.
Still, Dischler is confident that the market will come back at some point, and stated that "quality of assets and cash" will be key elements for survival in the meantime.
For Ioannou, given the current price environment for copper, grade is the most important factor to consider. "Sticking to higher-grade stories that have good margins is probably the safest bet," he said.
In terms of companies to keep an eye on, Ioannou mentioned Capstone Mining (TSX:CS), Copper Mountain Mining (TSX:CUM) and Nevsun Resources (TSX:NSU). He pegged Capstone as a stable name with an established production profile and a decent balance sheet, and sees Copper Mountain as poised for a potential re-rating given the implementation of a secondary crusher at its Copper Mountain mine this year. "This is a mine that's been struggling for a number of years," he said. "I think they've finally turned the corner."
All in all, copper investors might have to bear low prices for a little while longer, but there could be good news to come in the medium term. As stated above, Ioannou believes that the situation could look up in 2017 or 2018.
"There's going to be a catch-up moment a few years down the road, and that's when we really see copper prices eventually taking off," he said. "I think $4 is very reasonable, if not even $5 for some amount of time."
